A good pairing in the digital economy – Part II


In part I of this blog, a case study summarizing the practical application of the Unified Pillar 1 Approach was exemplified with a graph. Here, we will summarize Pillar 2 and the UN proposal, with the aim of analyzing a potential complementarity of the proposals of both international organizations, in terms of taxation of digital goods and services revenues.

PILLAR 2. GloBE Standards

The OECD published in December 2021[1] the GloBE rules (acronym of Global Anti-Base Erosion) to assist in the implementation of a reform of the international tax system, in agreement with the Pillar 2, which seeks to ensure that Multinational Companies (MNEs) are subject to a tax rate of at least 15 % from 2023. They have been endorsed by 137 countries and jurisdictions that are members of the OECD Inclusive Framework on BEPS, and the G-20.

The minimum tax will apply to MNE groups whose revenues exceed 750 million euros, in at least two of the last four fiscal years, in their Consolidated Financial Statements.

The GloBE rules establish a coordinated tax system to ensure that large multinational groups pay this minimum tax on income earned in each of the jurisdictions in which they operate, for which they will have to file a standard informative declaration in the adhering local jurisdiction.

These rules create a “complementary tax” which shall tax profits earned in any jurisdiction in which the effective tax rate, calculated by each jurisdiction, is less than the minimum rate of 15%.
The model rules of the Second Pillar also address the treatment of acquisitions and disposals of a group members and include a specific rule relating to certain holding structures and tax neutrality regimes. Finally, they address administrative aspects, such as the submission of informative declarations, and establish a transitional regime for multinational companies that are subject to the global minimum tax.


For its part, the UN Committee of Experts on International Cooperation in Tax Matters of the UN published a draft incorporation of Article 12B[2] of its Model Tax Treaty that would allow a jurisdiction to tax the income from certain automatic digital services[3] paid to a resident of the other Contracting State, on the understanding that the proposal could simplify the process for many developing countries, facilitating the treatment of the problems posed by taxing the digital economy without this being incompatible with the efforts being made at the global level to find a multilateral solution.

Article 12B allows a Contracting State to transfer revenue from certain digital services paid to a resident of the other Contracting State on a gross basis to a bilaterally negotiated rate, with an option for the taxpayer to pay taxes on a base net profit for the whole year under paragraph 3 of the article.[4]

In the  draft approval comments[5], it is mentioned that many developing countries have limited administrative capacity and need a simple, reliable and efficient method to enforce the taxation of income from automated digital services provided by non-residents. A withholding tax regime on the gross amount of payments made by residents of a country is established as an effective method of collecting from non-residents. This method of taxation may also simplify compliance for companies providing such services in another country, as they would not be required to compute their net profits or file tax returns, unless they opt for the taxation on a net income basis.

The United Nations Model Convention tends to preserve greater tax rights for the “source” country when income is produced. Thus, in order to avoid double taxation, the country of “residence” of the individual generating the profits must provide a discount for the taxes paid or a tax exemption from such income.[6]

The term “automated digital services” on which this direct approach applies, include digital activities that differ substantially in terms of the genesis of their profits and therefore the presumption of taxed income. If a withholding tax regime is applied on the gross amount without distinction of categories, the tax could be inequitable, by default or by excess.

Although companies may have the option of requesting to be taxed on the net margin of paragraph 3, there is no mention of the possibility of establishing differential profit assumptions in bilateral agreements, depending on the types of business.


Since the inclusion of the foundation stone that we have known as “BEPS Action 1”, much progress has been made in the search for tax methods that ensure a fair and equitable taxation, where borders seem to disappear with the advance of the communications technology.

The OECD Digital Economy Working Group has made strenuous efforts to compile proposals that would lead to a fair and equitable mechanism for the distribution of taxation rights. The universe targeted is composed of large multinationals with significant global and jurisdictional income levels, whose magnitude justifies the determinative and comptroller effort involved.

However, the risk derived from the application of these thresholds should not be overlooked, and maneuvers tending to split or segment companies, activities or functions in order to avoid the method should be prevented.

On the other hand, it should be borne in mind that currently the majority of multinational companies operating in the supply of digital goods and services are located in the Northern hemisphere, more precisely in the USA, China and Europe. For this reason, the application of the unified Pillar 1 approach and the GloBE rules will have greater significance in countries where these companies establish their bases, in order to preserve the tax bases.

In emerging countries where there is no physical presence or permanent establishment, there is little in the way of tax potential to secure the legal asset, the application of amount A could generate additional tax revenue from a consensual formula that simplifies the process. The disadvantage could be rooted in the difficulty in accessing the group’s information and documentation in order to exercise adequate control of the tax interests.

The GloBE rules, on the other hand, would benefit jurisdictions with parent companies since the arbitrary use of others with a taxation lower than 15% is discouraged. However, their determination is truly complex and will require a strong specialization of the parties involved in the determinative process.

The UN proposal is perceived as more appropriate for emerging countries due to its simplicity, a necessary condition that requires a limited tax administrative capacity. Legal double taxation could be avoided with similar tax credits that must be dealt with in the respective consensuses.

In short, the UN proposal should not be the antithesis of the unified approach and the GloBE rules since it could be applied in an appropriate pairing under certain conditions. This is so, inasmuch as its application could include companies below the global and jurisdictional income threshold, applying the tax to routine (local) income for sale of digital goods and services without physical presence, provided that the tax source has been configured according to the local legislation.

With an adequate legislative implementation, fiscal dwarfing maneuvers could be avoided, since the spin-offs tending to fall below the thresholds proposed by the OECD would be reached, while ensuring tax revenues to the smallest jurisdictions, in a simplified manner and at the very moment when the digitalized economic tax event takes place.

[1] https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.pdf
[2] https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/CITCM%2022%20CRP.1_Digitalization%206%20April%202021.pdf
[3] For this purpose, the automated digital service was defined as those provided on the Internet or an electronic network that requires minimal human participation in the provision of the service.
[4] the qualified profits will be thirty percent of the amount resulting from applying the profitability index of the automated digital services of the final beneficiary’s business segment to the annual gross revenues of automated digital services derived from the Contracting State from which such revenues originate.
[5] https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/CITCM%2022%20CRP.1_Digitalization%206%20April%202021.pdf – See page 8 and following
[6] https://www.un.org/development/desa/financing/es/what-we-do/ECOSOC/tax-committee/thematic-areas/UN-model-convention

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